So, what exactly is a stock?
Also known as a share or an equity, a stock is a type of security that represents ownership of a company.
Owning a company’s stock gives the shareholder a claim to a part of the company’s assets and earnings.
Let’s break it down a bit…
Take this pizza. This represents the whole company.
The pizza is broken up into 10 slices, each slice representing one share.
You decide to purchase one share, representing 10% ownership in the company…
Someone else could then purchase five shares, representing a 50% stake in the company.
Of course, when you invest on the ASX, your ownership share will be much lower than these figures. But you get the point.
You can make money from stocks two ways: through capital appreciation and dividends.
Which brings me to the next question…
What Makes Stock Prices Change?
At its most basic, stock prices change based on supply and demand.
A large number of interested buyers will likely push up the price of a stock.
Conversely, selling pressure can take a stock price down.
However, price changes don’t always reflect the outlook or current status of a company.
That’s why it’s important for you to understand if you’re buying for the long or short term, and that you have a clear understanding of what you’re buying.
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You’ll also benefit from an understanding of volume.
This refers to the number of shares being traded each day.
Big stocks like the Aussie banks trade millions of shares every day.
Smaller stocks often have much less trading taking place, and that makes them much more volatile.
How Do Stocks Trade?
Most stocks trade on exchanges.
The purpose of of this is to enable transparent and efficient transactions between buyers and sellers.
You are probably familiar with some of the big US exchanges like the New York Stock Exchange and NASDAQ.
The most relevant to an Australian investor is the Australian Stock Exchange or ASX for short.
The ASX was formed in 1987 after parliament drafted legislation that enabled the merger of six independent state-based stock exchanges.
You can only access the ASX — to buy and sell shares — through a stockbroker.
So, it’s important to set up an account as a first step.
Keep in mind that the minimum amount of money required to trade on the ASX is $500.
This doesn’t include brokerage fees, which can range in price.
Now you might be asking ‘where do I find a broker’?
That brings me to another important point. Keep watching…